A Report from the Economic Research Service
United States
Department
of Agriculture
WRS-0703
August 2007
www.ers.usda.gov
China Currency Appreciation
Could Boost U.S. Agricultural
Exports
Fred Gale and Francis Tuan
Abstract
Contents
Introduction...............................1
The Exchange Rate
Issue.......................................2
How an Undervalued Currency
Favors Local Products.........4
Comparing Apples to Apples....8
Chinese Farm Prices Vulnerable
to Appreciation......................10
Transportation Costs and Tariffs
Affect Imports........................12
Grains and Field Crops Most
Likely to Be Affected by
Exchange Rate Change.......14
China Price Rises Narrow the
Gap Slightly.............................17
Appreciation May Bring
Domestic Stresses and
Chinese Countermeasures...19
Fixed Exchange Rate Impedes
Adjustments...........................20
References................................21
Appendix...................................23
Approved by USDA’s .
World Agricultural .
Outlook Board
U.S. exports of soybeans and cotton to China have boomed in recent years, but the undervalued exchange rate for the Chinese yuan keeps prices of most other U.S. food and agricultural products more expensive than Chinese products. On average, Chinese retail food
prices are about a fourth of U.S. prices. Land-extensive commodities like soybeans, cotton,
corn, and wheat have relatively high prices in China, but soybeans and cotton are the only
major crops that China imports in significant quantities. With an undervalued exchange rate
China’s prices are not high enough to attract imports of grains or most livestock products.
Appreciation of the Chinese currency would increase the purchasing power of Chinese
consumers on world markets and increase China’s demand for imported commodities.
However, Chinese policymakers are likely to maintain a cautious approach to currency
appreciation, motivated in part by farm income and food security concerns.
Keywords: China, agricultural, food, retail, farm, prices, exchange rate, currency, yuan,
appreciation, exports, trade, apples, soybeans, corn, wheat
Acknowledgments
The authors were able to gain a deeper understanding of Chinese price collection and
reporting through an exchange of visits during 2005, funded by USDA’s Emerging
Markets Program, with China’s National Development and Reform Commission,
National Bureau of Statistics, National Grain and Oils Information Center, and Ministry
of Agriculture. We thank two USDA colleagues, Larry Beard of the National Agricultural
Statistics Service and John Van Dyke of Agricultural Marketing Service, for their contributions to the exchange program. Zhang Luxiong of China’s National Development
and Reform Commission played an instrumental role in organizing travel in China. The
authors thank Brad Gilmour of Agrifood Canada, Laping Wu of China Agricultural
University, Casey Bean and Owen Wagner of USDA’s Office of Agricultural
Affairs in Beijing, David Stallings of USDA’s World Agricultural Outlook
Board, and Bryan Lohmar, Stephen MacDonald, Eric Dohlman, Bill Liefert,
Janet Perry, and Mary Anne Normile of USDA’s Economic Research Service
for comments on the manuscript. We thank Greg Pompelli, also of USDA’
Economic Research Service, for coordinating the review of the report. The
author also thanks Priscilla Smith for editorial assistance and Wynnice
Pointer-Napper for the graphics and layout.
ii.
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Introduction
China is being pressured by the United States and other trading partners to
allow its currency to appreciate. In June 2007, the U.S. Treasury concluded
that the Chinese yuan was undervalued and that the Chinese central bank’s
intervention in the foreign exchange market contributes to China’s persistent trade surpluses and rapid accumulation of foreign exchange reserves. In
response to pressure from trade partners, China’s monetary authorities have
allowed the value of the yuan to rise gradually since July 2005. However,
Chinese policymakers are concerned that a sharp change in the exchange rate
could result in economic dislocations and financial market instability, and
they have adopted a go-slow approach to exchange rate policy reform. Many
analysts believe a much larger appreciation is needed in order to narrow
China’s trade surplus.
Discussions about China’s exchange rate are mainly focused on how appreciation of the yuan would affect merchandise trade and financial markets, but
exchange rates have important effects on agricultural commodity markets
as well (Shane and Liefert).1 As the yuan appreciates against the dollar,
U.S. commodities will become more price-competitive in China, potentially increasing China’s demand for agricultural imports. However, not
all commodities will be affected equally by currency appreciation, and the
potential effects on China’s agricultural and food economy are complex.
This report examines how the undervalued yuan affects China’s competitive
performance in domestic and international markets for agricultural commodities and food products. The report compares Chinese and U.S. prices for
various foods and agricultural products to provide perspective on the pricecompetitiveness of U.S. agricultural products in China and allow informed
assessments of how currency appreciation may affect that competitiveness.2
1 China’s
exports are dominated
by machinery, electrical equipment,
textiles, toys, and other manufactured
goods. Its imports are primarily raw
materials, unassembled components,
and capital goods such as machinery.
See Morrison and Labonte for more
background on exchange rates.
2 The increased availability of price
data at the retail, wholesale, and farm
levels in China and the increasing role
of markets in setting prices make such
an analysis feasible. See appendix,
“Food and Agricultural Price Data in
China.”
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The Exchange Rate Issue
Following a series of devaluations and reforms in the 1980s and early 1990s,
China maintained a fixed exchange rate of roughly 8.3 yuan per 1 U.S. dollar
from 1996 to 2005. Over that period China’s trade surplus grew from $12
billion per year to $102 billion. Under pressure from the United States to
narrow its trade surplus, Chinese monetary authorities made modest changes
in July 2005. Authorities allowed a one-time 2.1-percent yuan revaluation
and allowed the currency’s value to float slowly upward within a narrow daily
band. The yuan appreciated against the dollar to 7.6 yuan per dollar in July
2007, a cumulative appreciation of 9 percent over 2 years.
The currency has not appreciated fast enough to narrow China’s trade surplus,
which grew to $177.5 billion in 2006, and was projected to exceed $250 billion in
2007. China’s surplus with the United States widened to a record $232.5 billion
in 2006. China’s foreign exchange reserves continued to grow as well, reaching a
world-leading $1.33 trillion in mid-2007, up from $150 billion in 1999.
Even with an undervalued yuan, the United States has a net surplus with
China in agricultural trade, and China is one of the top four markets for U.S.
agricultural exports. U.S. agricultural exports to China have grown sharply,
rising to $6.7 billion in 2006 from $2 billion in 2002 (fig. 2). However, U.S.
agricultural exports are concentrated in just a few commodities. Apart from
Figure 1
China-U.S. exchange rate, 1985-2007
Yuan/dollar
10
8
6
4
2
0
1985
87
89
91
93
95
97
99
2001
03
05
07
Source: St. Louis Federal Reserve Bank.
Figure 2
U.S. agricultural trade with China, 1982-2006
Dollars (billions)
7
6
5
4
3
2
1
0
Exports to China
1985
87
89
Imports from China
91
93
95
97
99
2001
03
05
Source: U.S. Department of Agriculture, Foreign Agricultural Service.
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booming sales of soybeans, cotton, and animal hides, U.S. agricultural products mostly occupy limited high-end niches in Chinese food markets.
As the Chinese currency appreciates, more U.S. agricultural products will
become price-competitive in China, and export sales to China may grow even
larger. Appreciation of the Chinese yuan will also reduce the competitiveness
of China’s rising exports of vegetables, fruits, and juices.
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How an Undervalued Currency Favors
Local Products
At the current exchange rate, most U.S. agricultural products are more expensive than their Chinese counterparts. Low domestic food prices allow Chinese
consumers to attain a reasonably good standard of living on seemingly
meager incomes as long as they buy domestic products. Chinese consumers’
incomes do not buy nearly as much on international markets where prices are
denominated in dollars.
The difference in the amount of real goods and services that can be purchased
in China and the United States with a given amount of currency suggests
that the economic concept of “purchasing power parity” does not hold, an
indicator that the exchange rate is not at its equilibrium value (see box,
“Purchasing Power Parity”). As a result, imported foods in China are much
more expensive than domestic products, and consumer demand for imports is
limited to high-end niche items.
A U.S. dollar buys far more goods and services in China than in the United
States, a fact familiar to U.S. travelers to China. In December 2006, the
average Chinese retail price of wheat flour was 2.8 yuan per kilogram, while
the average U.S. price for flour was $0.33 per pound, or 5.8 yuan per kg
when converted at the official exchange rate. At an exchange rate of 8 yuan
per dollar, $1 could buy nearly twice as much flour (2.86 kg) in China as it
can in a U.S. supermarket (1.38 kg).3 By the same logic, a relatively small
expenditure in Chinese yuan is required to purchase a given amount of flour.
Average annual flour purchases of Chinese households of 12.5 kg (27.5 lbs)
would cost 35 yuan if purchased at local Chinese prices. However, a Chinese
consumer would need more than 73 yuan to buy the same quantity of flour at
U.S. prices in dollars.
3In this report we converted weights
to kilograms (2.2 lbs) or metric tons
(1,000 kg) when making cross-country
comparisons. When Chinese prices
were reported in jin (0.5 kg or 1.1 lbs)
in the original source, we converted
them to kg.
The wide difference between the amount of real goods and services Chinese
consumers can buy with their incomes domestically versus what they can
buy on world markets also suggests that the U.S. and Chinese currencies are
far from purchasing power parity (PPP). In order to bring about PPP at these
domestic prices for flour, the exchange rate would have to appreciate by 100
percent to 4 yuan per dollar to equalize U.S. and China flour prices.
Of course, while a single price comparison facilitates explanation and assists
understanding, it is not adequate to assess whether PPP holds. We compared
U.S. and Chinese food prices for 30 retail food items in July 2006 using
official data from price surveys in China and the United States to assess
the differences. The selection of food items was dictated by the availability
of data from the price surveys, but we tried to include a broad selection of
items from different food groups. Chinese and U.S. diets and food availability differ, so it is difficult to find prices for similar items. In some cases,
we supplemented official surveys with prices observed from supermarkets or
provincial data. We tried to compare foods of similar quality when possible,
and cheaper cuts of U.S. meat were used to compare with Chinese meat
prices that did not specify a cut. Differences in quality may account for part
of the difference in prices. The month chosen for the comparison was arbitrary; the comparisons did not vary by season or year.
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Purchasing Power Parity
When assessing exchange rates, economists often rely on the concept
of “purchasing power parity” (PPP), a hypothetical longrun equilibrium
where exchange rates are set so that a dollar can purchase an equal amount
of real goods or services in all countries when converted to local currencies. If a dollar can buy more goods in one country than another, dollars
are expected to flow into the low-price country, bidding up the price of that
country’s currency until PPP is restored.
In simple terms, if China and the United States traded only a single
commodity, PPP would hold if the price of the commodity in dollars
were equal to the Chinese price in yuan multiplied by the exchange rate.
Mathematically, the Chinese price in yuan (PCH) would equal the exchange
rate in yuan per dollar (e) times the U.S. price in dollars (PUS):
PCH = e × PUS
While this equation rarely holds in practice (transportation costs, tariffs,
trade barriers, sanitary and phytosanitary rules, environmental regulations,
and other factors can prevent prices and exchange rates from equalizing)
economists expect exchange rates and prices in different countries to move
toward the equilibrium described by the equation. It is difficult or impossible to calculate the exchange rate that would bring about PPP between
the U.S. and Chinese currencies, but it is clear that PPP does not hold at
the current exchange rate of about 7.6 yuan per dollar.
The Economist’s “Big Mac index” is a popular lighthearted application
of the PPP concept, and gives a similar result. It compares the price of a
homogeneous commodity—a Big Mac hamburger—in various countries
valued at the official exchange rate with the U.S. price. An index of 1
indicates that PPP holds, but the Big Mac index for China was 2.4 in 2006,
indicating that the U.S. price was 2.4 times the Chinese price. China’s Big
Mac index is one of the highest of all countries included in the survey.
The World Bank’s International Comparison Program estimates that China’s
gross domestic product in PPP dollars is four times the GDP converted at the
official exchange rate. Wu (1999) cited six such comparisons based on data
from the late 1980s that found Chinese incomes in PPP terms were three to
nine times higher than incomes at the official exchange rate. Chen, Gordon,
and Yan compared Canadian and Chinese food expenditures using 1989 data
and found a ratio of 4.6 between Canadian and Chinese food prices, surprisingly close to the ratio calculated in the current study.
We converted all prices into dollars per kilogram using the official exchange
rate of 8 yuan per dollar that prevailed at the time and calculated the ratio
of the U.S. price to the China price. Most prices are farther apart than flour
prices (table 1). Every food price compared was higher in the United States,
again suggesting that a dollar buys more food in China than in the United
States. Most items were two to four times more expensive in the United
States. However, the magnitude of the cross-country difference in prices
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Table 1
China-U.S. comparison of retail food prices, July 2006
Unit
China
U.S.
U.S.-China ratio
Description
Grains and oils:
Wheat flour
Rice
Salad oil
Peanut oil
Dollars/kilogram
$/kg
$/liter
$/liter
.35
.33
1.00
1.79
.75
1.23
1.811
2.771
2.1
3.7
1.8
1.6
Standard flour
Long grain uncooked
Blended cooking oil
Animal products:
Poultry meat
$/kg
1.30
2.29
1.8
Eggs
$/kg
.64
1.78
2.8
Pork
$/kg
1.86
7.28
3.9
Lamb
$/kg
2.76
9.881
3.6
Beef
$/kg
2.39
7.00
2.9
Fish
$/kg
1.35
6.581
4.9
Milk $/gallon
2.13
3.08
1.5
Whole chicken, fresh
U.S.: Grade A, large
U.S.: Chops, center-cut, with bone
China: fresh lean pork
U.S.: Lamb shank
China: Fresh lamb
U.S.: Average, all cuts ex. sirloin steak
China: Fresh beef
U.S.: Tilapia fillet
China: Live grass carp
U.S.: Whole, fortified
Fruit:
Bananas
Apples
Oranges Grapes
Pears Peaches
Strawberries
$/kg
$/kg
$/kg
$/kg
$/kg
$/kg
$/kg
.48
1.01
.632
1.383
.442
.503
.453
1.12
2.52
2.05
5.57
2.64
3.05
5.17
2.4
2.5
3.3
4.1
6.0
6.1
11.5
China: domestically produced
U.S.: Red Delicious; China: Fuji
U.S.: Navel orange; China: Mandarin
U.S.: Thompson seedless
U.S.: Anjou; China: Ya
Potato
Rape greens Green pepper
Celery
Chinese cabbage
Garlic
Broccoli
Tomatoes
$/kg
$/kg
$/kg
$/kg
$/kg
$/kg
$/kg
$/kg
.25
.30
.68
.31
.19
.55
.25
.30
1.22
2.404
3.89
3.281
3.281
5.481
3.32
3.25
5.0
7.9
10.4
10.5
17.5
10.1
13.3
11.0
White potatoes
China and U.S.: You cai
Sugar
$/kg
.84
1.11
1.3
U.S.: 12-oz container
Vegetables:
U.S.: Bok choi; China: Da bai cai
U.S.: Packaged garlic
U.S.: Field-grown
Refined sugar
Note: Average prices for 35 Chinese cities reported for July 2006 except where indicated. Chinese prices converted from yuan per jin .
(1 jin = 500 grams) using official exchange rate of 8 yuan/U.S. dollar. U.S. prices are city averages from U.S. Bureau of Labor Statistics except
where indicated and converted from dollars per pound using the ratio of 2.2 kg/lb. Prices are not strictly comparable between the two countries
due to differences in quality, degree of processing, marketing costs, and packaging.
1Source:
U.S. supermarket prices for online shoppers in Phoenix, AZ.
2Price
for Harbin City (Heilongjiang Province Price Bureau).
3Price
for Jilin Province (Jilin Agriculture Information Net, http://www.jlagri.gov.cn/price/index.asp).
4Source:
Ethnic Chinese supermarket in Washington, DC area.
Source: Calculations by U.S. Department of Agriculture, Economic Research Service, based on data from China Price Information Center and
U.S. Bureau of Labor Statistics unless indicated otherwise.
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varied widely, from 30 percent higher for sugar to more than 10 times higher
for most vegetables. As noted, the average flour price in the United States
was about twice as high, but the price of rice—the primary staple grain in
most of China—was 3.7 times higher in the United States. The largest price
differences were for vegetables, most of which were 10 times more expensive
in the United States. Only a few items (cooking oil, poultry, milk, and sugar)
had U.S.-China price ratios less than 2.0.
We summarized these price comparisons by calculating an index of domestic
prices in the two countries. The index values a basic consumption bundle
of foods at U.S. and Chinese prices using July 2006 prices (table 2). The
bundle of foods is the average per capita quantities consumed by Chinese
urban households in 2001. At Chinese prices, the cost of these items would
be 1,790 yuan, or $224, at an exchange rate of 8 yuan per dollar. The same
bundle of foods purchased at U.S. prices would cost $920, more than four
times the cost at Chinese prices. This comparison suggests that the exchange
rate would need to be less than 2 yuan/dollar—a fourfold appreciation in the
yuan—in order to achieve purchasing power parity in food.
These price comparisons do not take into account transportation costs, tariffs,
and differences in quality, safety, or other attributes. A more careful assessment would compare the price of U.S. products available for sale in China
with the price of domestic Chinese products. This is difficult, however, since
few U.S. food products are available for sale in China. In the following
section we provide a more careful price comparison for apples, one of the
few U.S. food products that is widely available in Chinese supermarkets.
Table 2
Index of U.S.-China food costs, 2006
Food item
Estimated expenditures per capita1
At Chinese prices2
Grains, potatoes, oils
Meat, fish, eggs, dairy
Vegetables4
Fruit Sugar
Total
At U.S. prices3
—————— Dollars —————— Index
42
129
34
19
3.5
126
368
370
66
4.6
Ratio
3.0
2.8
11.2
3.4
1.3
224
920
4.1
1Expenditures
estimated by multiplying average per capita purchases from China National
Bureau of Statistics urban household survey, 2004 by prices reported in table 1, except where
noted. Calculations exclude melons, beverages, nuts, snacks, shrimp, and food away from
home. The total expenditures at Chinese prices are about 60 percent of urban food expenditures
reported by China National Bureau of Statistics.
2Quantity
x Chinese price converted to dollars at official exchange rate.
3Quantity
x U.S. price.
4The
index for vegetables was calculated using prices for 6 vegetables for which comparable
U.S. and Chinese prices could be obtained. Vegetable expenditures at Chinese prices are
obtained from CNBS Urban Household Survey for 2005. The U.S.-China ratio estimated for the
six vegetables was multiplied by vegetable expenditures at Chinese prices to estimate vegetable
expenditures at U.S. prices.
Source: China National Bureau of Statistics, Urban Household Survey and prices from table 1.
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Comparing Apples to Apples
In this section, we compare the price of U.S. apples available in Chinese
supermarkets with the price of various domestic Chinese apples. Apples are
also a heterogeneous item that can vary in quality, color, size, and taste, all
attributes that can affect the price. A careful comparison shows that U.S.
apples sold in U.S. supermarkets are much more expensive than Chinese
apples of similar quality that are sold in a Chinese supermarket.
The average retail apple prices reported by U.S. and China statistical agencies are for two different types of apples (Red Delicious in the United States,
domestic Fuji in China), but apples of varying price and quality are available
in both countries. Imported U.S. apples are valued by Chinese consumers for
their appearance and are given as gifts. But much cheaper Chinese apples
are purchased for everyday consumption. There is, however, competition
between U.S. and domestic apples sold in Chinese stores. In visits to Beijing
supermarkets in July 2007, the authors found domestic Chinese apples very
similar in appearance to U.S. apples. Sanchez and Wu report that demand for
imported apples is weakening as high-quality apples are produced locally in
China at lower prices.4
According to the China Price Information Center, China’s national average
apple price for January 2007 was 5.6 yuan per kilogram, but prices reported
by a Chinese supermarket5 (Tianhui Supermarket Fruit Prices, January 5,
2007) showed domestic apples available at widely varying prices, from 3
yuan/kg to 10 yuan/kg (fig. 3). Imported apples were priced at 15.60 yuan/kg,
nearly three times the price of commonly purchased domestic apples like
Shaanxi Fuji (5.8 yuan/kg), and still 50 percent more than “high-quality”
domestic Fuji apples and Aksu apples from western China.6 The 50-percent
premium for imported apples is much less than the differential for apples
Figure 3
4 U.S.
apple exports to China declined by 33 percent in 2006.
5 Tianhui
supermarket is in Wuxi, a
medium-sized city in Jiangsu Province,
one of China’s wealthier regions.
6
The price of domestic apples sold
by small vendors is even lower than
the supermarket price. Domestic fruit
is purchased predominantly from small
vendors while imported fruit is purchased primarily in supermarkets.
Imported apples are priced 50 percent higher than high-quality
domestic apples in China
Yuan/kilogram
15.6
10.0
9.6
7.0
6.8
5.8
5.6
4.0
Imported “Quality” Xinjiang Xinjiang “Golden”
apples
Fuji
“akesu” “common”
high
quality
Shanxi
Fuji
China
average*
“Liaofu”
3.0
Gala
Note: Chart shows Internet price quotations for January 2007 obtained from Tianhui
supermarket, a Chinese retail chain that features fresh produce.
*China average is the national average retail price reported by China Price Information Center.
Source: Tianhui Supermarket, except where noted.
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reported in table 1, but it still suggests that the yuan is significantly undervalued when products of similar quality are compared.
Other imported-fruit prices reported by the Chinese supermarket were also
well above domestic prices. U.S. oranges were 11.8 yuan/kg and Australian
tangerines were priced at 27.6 yuan/kg, while Chinese citrus fruits were
priced from 5 to 8 yuan/kg. Domestic plums were priced at 3 to 5 yuan/kg
while imported plums were over 37 yuan/kg.
Wholesale fruit prices quoted by the Xinfadi Agricultural Products market
in Beijing (one of China’s largest agricultural markets) on March 2, 2007
showed an even bigger difference between imported and domestic fruit. U.S.
pears were quoted at prices of 24-26 yuan/kg, about five times the price of
the most expensive domestic pears (fragrant). U.S. red grape prices were
quoted at 32-38 yuan/kg, more than four times the price quoted for domestic
red grapes. U.S. plum prices were in a similar price range, but no domestic
plum prices were quoted.
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Chinese Farm Prices Vulnerable
to Appreciation
While nearly all retail food prices in China are lower than U.S. prices, farmlevel prices of some unprocessed farm commodities produced in China are
higher than those received by U.S. farmers. Two of these commodities—
soybeans and cotton—account for most U.S. farm exports to China. Currency
appreciation would make these commodities even more competitive in China
and expose Chinese farmers to greater competition.
In 2005 (the most recent year for which data for a wide array of commodities were available), U.S. soybean, corn, cotton, and wheat prices at the farm
gate were about 25-40 percent lower than those received by farmers in China
(table 3). Peanut and rice prices were just slightly lower in the United States.
Farm gate livestock prices were comparable to China’s or slightly higher in
the United States. U.S. pork and poultry prices were a few percentage points
higher than those in China, while egg and milk prices were 30-50 percent
higher in the United States. Most horticultural products were much cheaper
in China than in the United States, but the difference in prices was not as
wide as at the retail level. The U.S. farm price for apples was about 2.2 times
the Chinese price. U.S. prices of spinach, cauliflower, cucumbers, and green
peppers were two to four times Chinese prices, and the U.S. tomato price was
over eight times the Chinese price.
Table 3
Comparison of prices received by Chinese and U.S. farmers, 2005
Commodity
China
U.S.-China ratio
$ per 1,000 kg
Soybeans
Corn
Wheat
Cotton
Rice
Peanuts
Pork
Poultry
Eggs1
Milk
Potatoes
Apples
Cauliflower
Spinach
Cucumbers
Green pepper
Tomatoes
1
U.S.
310
134
167
1,500
187
401
972
964
617
251
98
186
235
219
150
200
112
203
79
125
1,080
172
384
1,095
1,014
916
334
152
404
662
496
507
734
915
.65
.59
.75
.72
.91
.96
1.13
1.05
1.48
1.33
1.56
2.17
2.81
2.27
3.38
3.67
8.49
U.S. price converted from dollars per dozen assuming a weight of 21 ounces per dozen eggs.
Note: China prices are annual averages from cost of production surveys. Chinese prices
converted from yuan per kilogram using the official exchange rate of 8.28 yuan per dollar that
prevailed during 2005. U.S. prices are market-year U.S. averages converted from dollars per
bushel, per pound or per hundred pounds.
Sources: ERS calculations based on data from National Development and Reform Commission
Price Office and U.S. Department of Agriculture, National Agricultural Statistics Service.
10.
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These farm price comparisons are mostly consistent with China’s agricultural
trade patterns. In most years, China imports soybeans, cotton, and wheat,
which have relatively high prices in China. As China’s currency appreciates,
imported grains and oilseeds will become even more price competitive vis
á vis Chinese commodities, and imports may expand further. China exports
corn despite having relatively high corn prices, but currency appreciation
might turn China into a corn importer. China’s trade in livestock products
is relatively small, but appreciation of the yuan would make imported meat
more attractive to Chinese buyers. Currency appreciation would reduce
China’s substantial price advantage in fruit and vegetable product exports,
most of which are priced well below U.S. products.
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Transportation Costs and Tariffs
Affect Imports
Comparisons of average domestic prices in the two countries are broadly
indicative of price differentials between China and the United States, but the
actual price-competitiveness of U.S. products in China depends on transportation costs, tariffs, taxes, and quality differences. We illustrate how differences in farm prices translate to the competitiveness of U.S. commodities in
China by performing a more careful comparison of U.S. and Chinese prices
of soybeans—the largest U.S. agricultural export to China.
The difference between Chinese and U.S. farm prices for soybeans is mostly
dissipated by transportation costs and Chinese taxes, but U.S. soybeans are
still price-competitive with Chinese soybeans by the time they reach processors in China (fig. 4).7 In December 2006, U.S. farm prices for soybeans
averaged $6.14 per bushel ($223 per metric ton). Prices in Heilongjiang
Province of northeastern China—the main production region for soybeans—
averaged 2,474 yuan per metric ton, equivalent to $8.52 per bushel ($317 per
metric ton), about 39 percent higher than the U.S. price.
The difference between U.S. and Chinese farm gate prices diminishes as transport costs and taxes are added. Both U.S. and domestic soybeans must be shipped
to crushing plants located in coastal areas of China.8 According to news reports
in January 2007, the average price of domestic soybeans paid by crushing plants
in Shandong Province (about 800 miles from Heilongjiang) was 2,720 yuan and
the price of U.S. soybeans arriving in Shandong Province, was about 2,850 yuan,
about 5 percent higher than the price of local soybeans.9
While imported U.S. soybeans are slightly more expensive than domestic
beans, crushers are willing to pay a premium for them due to their higher oil
content, uniform size, and overall quality. Chinese imports of soybeans from
Figure 4
Comparison of U.S. and Chinese soybean costs to Chinese
crushing plant
7 According
to China customs
statistics, China imported 1.77 million
metric tons of U.S. soybeans in December 2006 and 9.9 million tons for the
calendar year.
8
Older crushing plants in China
are located in interior provinces like
Heilongjiang and Jilin, and they crush
primarily domestic soybeans. Most
newly constructed plants are located in
coastal areas where they crush primarily imported soybeans.
9
Shandong Province is also a major
soybean production area, but its use
of soybeans exceeds local supplies.
Shandong’s Qingdao port accounts for
the largest share of China’s soybean
imports.
Yuan/metric ton
3,000
2,500
2,000
1,500
Domestic transport
cost
China tariff and
value added taxes
Transport to China
Transport to
U.S. Gulf port
Price at crushing
plant, Shandong China
Price at China
border
Farm price
1,000
500
0
U.S. soybeans
Domestic Chinese soybeans
Note: Prices are for January 2007. Dollar values converted to Chinese yuan at an exchange
rate of 7.8 yuan per dollar.
Sources: ERS calculations based on the following data: U.S. farm price from
U.S. Department of Agriculture, National Agricultural Statistics Service. China farm price
and price of soybeans at crushing plant from China Ministry of Agriculture. Transport to
China and price at U.S. Gulf ports from U.S. Soybean Export Council. Price at China port
calculated from China customs statistics.
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the United States, Brazil, and Argentina reached 28.3 million metric tons for
calendar year 2006, accounting for over 60 percent of China’s soybean use.
Without soybean imports, domestic Chinese prices would be much higher
since Chinese demand would far outstrip domestic supply.
Farm gate Chinese corn prices were 50 percent higher than U.S. prices in
December 2006, but there were no shipments of U.S. corn to China because shipping costs, tariffs and taxes push the cost of U.S. grains above the cost of Chinese
grain (fig. 5). Adding shipping costs, Chinese tariffs and value added taxes (VAT)
brought the estimated cost of U.S. corn arriving in China well above the price of
Chinese corn. Chinese wheat prices were 12 percent above the U.S. price, and the
price of U.S. wheat arriving in China was also above the domestic price. Given
these price relationships, China imported little wheat or corn. During 2006, China
imported 584,000 metric tons of wheat, down from 3.5 million metric tons in
2005. China bought only one significant shipment of corn from the United States
in 2006. China was a net exporter of both of these commodities in 2006.
Price differences between the United States and China vary across commodities, reflecting resource endowments of the two countries. Land-extensive
field crops tend to have relatively high prices in China, reflecting the scarcity
of land, and labor-intensive vegetables and fruits have low prices.
Unhindered international trade would allow global resources to be used more
efficiently by concentrating grain production in the United States and other
land-abundant countries. However, only a few U.S. agricultural commodities
are price-competitive in China at current exchange rates. Just two commodities—soybeans and cotton—accounted for two-thirds of the value of U.S.
agricultural exports to China in 2006.10 In recent years, China has remained
near self-sufficiency in rice, wheat, and corn. While China’s reduction of
tariffs and other border measures has potential to enhance trade flows, its
undervalued exchange rate still impedes trade. In effect, China remains
reliant on a stressed natural resource base to meet the growing food demands
of a large and increasingly wealthy population.
10
Like soybeans, China’s cotton is
relatively expensive, and imports have
surged due to limited domestic supplies
and booming demand from China’s
textile industry.
Figure 5
Estimated price of U.S. and Chinese corn, Guangzhou, China
Yuan/metric ton
2,500
2,000
1,500
1,000
Chinese tariff
and taxes
Guangzhou price
Price arriving at
China port
Price at U.S.
Gulf ports
Farm price
Shipping to China
Shipping to
U.S. Gulf port
Domestic
transport cost
500
0
U.S. corn
Chinese corn
Note: Prices at Guangzhou port = January 2007. Price of U.S. corn is estimated; no U.S. corn
was shipped to China during this time period. Dollar values = 7.8 yuan per dollar. Port price of
U.S. corn does not include domestic transport cost within China.
Sources: ERS calculations based on data as follows: U.S. farm price, U.S. Department
of Agriculture, National Agricultural Statistics Service. Price at Gulf ports and ocean
freight: U.S. Grains Council. China prices: China Ministry of Agriculture.
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Grains and Field Crops Most Likely to Be
Affected by Exchange Rate Change
Appreciation of China’s currency would have the most immediate impact on
imports of unprocessed grains and field crops. The gap between imported
and domestic prices of vegetables, fruits, and processed foods is much wider.
Demand for these products would rise as the value of the yuan increases,
but a large appreciation of the yuan would be needed to bring import and
domestic prices closer together.
Consider how appreciation might affect the retail price of imported apples
in China. Chinese customs data show that U.S. apples arriving in China in
December 2006 were valued at $0.83 per kg. Adding China’s 10-percent
tariff and 13-percent value added tax would bring the cost to $1.03. At the
prevailing exchange rate it would take 8 yuan to purchase 1 kg of imported
U.S. apples at the port. The supermarket price of 15.6 yuan for imported
apples reported earlier in this report suggests that there is a margin of 7.6
yuan/kg between the port and the supermarket price.
As the Chinese exchange rate appreciates, it takes fewer yuan for Chinese
consumers to purchase imported apples at a given price in U.S. dollars, and
imports become cheaper relative to domestic products. Assuming that the
U.S.-dollar price and the 7.6-yuan port-supermarket margin remain constant,
the supermarket price of imported apples would fall from 15.6 yuan at an
exchange rate of 7.8 yuan/dollar to 14.8 yuan at an exchange rate of 7 yuan/
dollar (a 12-percent appreciation), still nearly 50 percent above the 10-yuan
price of high quality domestic apples and nearly three times the price (5
yuan) of apples commonly purchased by Chinese consumers (fig. 6). The
value of the yuan would have to more than double to 3 yuan/dollar (160
percent appreciation) to bring the imported apple price to 10.7 yuan, close to
the 10-yuan price of quality domestic apples. Nevertheless, while U.S. apples
are likely to remain more expensive than domestic apples with even a large
appreciation of 40 percent, consumption of U.S. apples in China will surely
rise as their price falls.
Fruits are the most common imported food items available in Chinese retail
markets. U.S. apples, oranges, grapes, cherries, and nuts occupy a high-end
market niche and would likely be among commodities that would benefit
from a Chinese exchange rate appreciation. Other food items with narrow
U.S.-China price differences, like dairy products, would also see an increase
in imports. Most vegetables, which have extremely low prices in China,
would require a very large appreciation in the Chinese currency to make
imports competitive in the China market.11
Imported processed foods tend to be even less price-competitive in China
due to the low cost of labor and other services which, in turn, reduce
food processing and marketing costs in China.12 A 2006 National Bureau
of Statistics Service Sector Survey Center study of rural migrants who
work in cities—a group that supplies much of the unskilled labor for food
processing and distribution—found that average wages for this group were
$120 per month, or $0.50 per hour.13 By comparison, the average wage for
11
Most of China’s vegetable imports
consist of cassava from Thailand and
Vietnam.
12 Ashenfelter
and Jurajda’s investigation of the effect of factor costs on the
Big Mac index found that the cost of a
Big Mac hamburger was consistently
below PPP in developing countries
where labor costs were low.
13
The National Bureau of Statistics
survey found that migrant workers
labored an average of 6.3 days per
week and 8.9 hours per day, implying
an average of 56 hours per week.
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Figure 6
Estimated Chinese supermarket price of imported apples
at different exchange rates
Estimated supermarket price (yuan/kilogram)
18
16
14
12
10
8
6
4
2
0
Port price
15.6 yuan
Tariff and tax
14.8 yuan
Distribution costs from
port to supermarket
10.6 yuan
7.8 yuan/dollar
7 yuan/dollar
Exchange rate
Supermarket price
of "high quality"
domestic apples
3 yuan/dollar
Note: Calculations assumed constant U.S. dollar port price of $.83 per kg. and a constant
distribution cost of 7.6 yuan per kg. Tariff on apples is 10 percent and value added tax is
13 percent.
Sources: Port price obtained from December 2006 China customs statistics. Supermarket
prices obtained from Tianhui Supermarket Fruit Prices.
production workers in U.S. food manufacturing is over $13 per hour, about
25 times higher than the wage for unskilled Chinese labor.14
It has been estimated that less than 5 percent of items in Chinese supermarkets are imported (Bean). The absence of imported items is likely due to
their high prices vis á vis domestic products. There are many foreign-brand
food products are available in Chinese retail markets, but most are produced
in China where costs are low. For example, a Shanghai supermarket flyer
obtained in June 2006 advertised frozen chicken nuggets produced in China
by a major U.S. food company at a price of 6.9 yuan per 500 grams. A
similar product would cost about $5 per pound in a U.S. supermarket, or over
40 yuan per 500g, more than five times the Chinese price.
14
U.S. wage calculated by ERS from
the 2002 Economic Census, U.S.
Census Bureau, as the ratio of production worker wages to hours worked for
NAICS code 311, food manufacturing.
Imported soybeans, wheat, and corn will become more competitively priced
in China as the Chinese currency appreciates. Assuming December 2006
prices and ocean freight rates, an appreciation of the Chinese yuan from
7.8 yuan/dollar to 7 yuan/dollar would reduce the cost of U.S. soybeans to
Shandong crushing plants from 2,850 yuan to 2,558 yuan per metric ton,
about 5 percent below the price of Chinese soybeans (fig. 7). A larger appreciation to 6 yuan per dollar would cut the cost of U.S. soybeans to 2,193 yuan
per metric ton, 20 percent below the January domestic price. The yuan would
have to appreciate to 6.5 yuan to bring the cost of imported corn close to the
threshold where imports are priced competitively vis a vis domestic grain.
At December 2006 prices, the yuan would have to appreciate to 5.5 yuan per
dollar for U.S. wheat to be price-competitive in China.
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Figure 7
Estimated price of imported commodities in China
at various exchange rates
Yuan/metric ton
3,000
Corn
Wheat
Soybeans
Domestic
price
2,500
2,000
Domestic
price
Domestic
price
1,500
1,000
500
0
7.8 7.5 7.0 6.5 6.0
7.8 7.5 7.0 6.5 6.0
7.8 7.5 7.0 6.5 6.0 5.5
Exchange rate (yuan/dollar)
Note: Figure 7 shows estimated price of imported commodities in Chinese currency at
different exchange rates. Calculations assume prices and shipping rates prevailing in
December 2006 remain constant.
Source: U.S. Department of Agriculture, Economic Research Service calculations using data
from China customs statistics and from China Ministry of Agriculture.
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China Price Rises Narrow the Gap Slightly
The difference between Chinese and U.S. prices can narrow without appreciation in the nominal exchange rate if prices in China grow faster than international prices. In 2006 and 2007 China appeared to enter a new cycle of rising
food prices, as its food Consumer Price Index rose 5.8 percent in 2006 and
6.8 percent year-on-year in May 2007 (fig. 8). U.S. food prices also rose, but
not as fast as Chinese prices. The surge in Chinese prices followed a period
of stagnant or declining prices during 1998-2002.
The rise in Chinese agricultural prices during 2006-07 appears to reflect
short-term supply interruptions rather than a general inflationary trend. In
May 2007, retail meat prices in China were up 17 percent year-on-year,
but the percentage change is large because pork and poultry prices were
depressed in mid-2006. Pork prices surged to record levels in May and June
2007 due to a combination of: a sharp reduction in hog inventories due to the
low prices in the previous year; a serious outbreak of disease in 2007 that
further cut hog inventories; and rising feed costs. Some observers anticipated
that a resurgence of hog inventories in response to high prices would push
hog prices back down in 2008. Retail grain prices were up 6.8 percent on
year-earlier levels, reflecting response of China’s corn and soybean prices to
increases in world prices and surging industrial use of corn in China. Chinese
rice and wheat prices, however, did not grow as fast. Vegetable prices were
down and fruit prices were essentially unchanged from year-earlier levels.
Consumer prices of most nonfood goods and services categories were up less
than 2 percent year-on-year in May 2007.
The recent increase in food prices in China combined with appreciation of
the exchange rate has narrowed the difference between Chinese and U.S.
food prices, but this follows a widening of the difference that occurred from
1998 to 2002. We calculated a U.S.-China food price index similar to that
shown in table 2 using monthly data for the period 1996-2007 to determine
how Chinese prices have grown relative to U.S. prices over the past decade
(fig. 9). We calculated the index using prices for eight commodities (rice,
Figure 8
Annual change in food prices, China and United States, 1997-2007
Change in food prices (percent)
8
6
4
United States
2
0
China
-2
1997
1998
99
2000
01
02
03
04
05
06
07
Note: Chart shows annual change in consumer price index for food. Data for 2006 are
for December. 2007 data are for May 2007.
Source: U.S. Bureau of Labor Statistics; China National Bureau of Statistics.
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Figure 9
Ratio of U.S./China food prices, 1997-2007
Index
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
1997
98
99
2000
01
02
03
04
05
06
07
Note: Chart shows ratio of cost of a fixed bundle of rice, flour, pork, chicken, eggs, apples,
potatoes, and tomatoes at U.S. and China prices, calculated monthly. China prices were
converted to dollars at the official exchange rate.
Source: Calculations by ERS using data from China Price Information Center
and U.S. Bureau of Labor Statistics.
flour, pork, chicken, eggs, apples, potatoes, tomatoes) for which data were
available over the entire period. The index indicates that U.S. prices were
about three times Chinese prices in 1997, but the ratio increased to four by
2002, as Chinese prices were stagnant or declining. A jump in Chinese prices
in 2004 reduced the index to about 3.2 in early 2005 before climbing back
to 3.5 in mid-2005. The increase in Chinese prices in 2006 and 2007 and the
appreciating exchange rate brought the index back down to three by mid2007, about the same level calculated for early 1997. Thus, the narrowing of
the difference between U.S. and Chinese prices since 2004 has reversed the
divergence that occurred from 1997 to 2003.
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Appreciation May Bring Domestic Stresses
and Chinese Countermeasures
The potential adverse effect of currency appreciation on China’s farmers
is a factor preventing Chinese authorities from loosening their grip on the
exchange rate. Currency appreciation would benefit Chinese millers, processors, livestock producers, and consumers by reducing raw material costs,
but Chinese farmers could be hurt by downward pressure on commodity
prices and farm incomes. In 2006, rumblings about unfair competition from
U.S. agricultural imports were already appearing in the Chinese press (Lan).
China’s central leadership, determined to maintain rural social stability, has
put a high priority on raising rural incomes. Additionally, China’s leaders
view reliance on imported grain as a potential threat to food security. Given
these policy priorities, China’s leadership will be slow to support currency
appreciation if it leads to an increase in grain imports.
The impacts of currency appreciation on China’s farmers could be muted
by various policy measures. Imports of rice, wheat, and corn are, in effect,
limited by tariff rate quotas on grain imports put in place by the country’s
World Trade Organization (WTO) commitments.15 It is likely that Chinese
authorities would take additional measures to control the flow of agricultural imports. Chinese authorities can control trade by using phytosanitary
barriers, restricting access to import quotas, imposing new regulations or
taxes, or subsidizing domestic products. In late 2006, China announced plans
for a new system to monitor and report agricultural commodity imports, and
it established a soybean producers’ association affiliated with the Ministry
of Agriculture. These steps are interpreted by many observers as mechanisms that will give China the capacity to exert greater control over soybean
imports and restrict them if necessary. Antidumping actions are another tool
China may use to protect domestic industries. China is the third-leading user
of anti-dumping actions worldwide (Carter and Gunning-Trant). In February
2007 China imposed tariffs on potato starch imports from European Union
countries in order to protect its domestic industry.
15 As
part of China’s WTO commitments, annual import quotas were
established for rice, wheat, corn, cotton,
wool, sugar, and vegetable oils at low
tariffs (only 1 percent for rice, wheat,
and corn). The quota amounts for rice,
wheat, and corn were roughly 5 percent
of domestic use of each commodity. Imports above the quota are assessed high
tariffs. The quotas are allocated among
applicants by government authorities,
and a share of each commodity’s quota
is reserved for state-owned trading enterprises. Quotas on vegetable oils expired
in 2006, and were replaced by a bound
tariff of 9 percent.
China has already introduced farm support policies that were intended in
part to counter increased competition anticipated following its WTO-related
lowering of agricultural trade barriers. Since 2004 China has paid modest
direct subsidies to grain producers, offered seed and machinery subsidies,
eliminated agricultural taxes that were linked to grain production, and set
minimum purchase prices for wheat and rice in key producing areas. In 2007,
China announced a major increase in subsidies for agricultural inputs and
new subsidies for hog breeders.
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Fixed Exchange Rate Impedes
Adjustments
When trade is unimpeded by tariffs and measures, international price differences dictate resource allocation by inducing economic actors to move goods
and services from countries where they are abundant to countries where they
are relatively scarce or costly to produce. Since the mid-1990s, China has
reduced barriers to trade and allowed most domestic prices to be determined
by market forces, but it has kept a tight hold on its exchange rate.
A low value of the Chinese yuan allows China to export labor-intensive
goods and horticultural crops that have low domestic prices, but it protects
field crops and other commodities that use land and other resources that
are scarce in China. Prices of field crops in China are high relative to other
domestic Chinese prices, reflecting the scarcity of land. Field crops like
grains, oilseeds, and cotton use scarce land to grow products that provide low
returns per acre. High crop prices attract domestic farm resources into crop
production. However, the undervalued exchange rate prevents Chinese crop
prices from rising high enough on global markets to attract imports of crops
(and livestock that consume feeds derived from crops) that would free up
cropland in China for more valuable uses.
With an undervalued exchange rate Chinese incomes have little purchasing
power on world markets. Because of the wide difference between domestic
and international prices of foods and other consumer goods, Chinese households are induced to consume primarily domestic products. At the same time,
low domestic prices for vegetables, fruits, and processed products encourage
China to export labor-intensive products at prices well below those of
competitors. These demands put pressure on China’s limited resource base to
supply the consumption needs of one-fifth of the world’s population as well
as the demands of overseas consumers in export markets.
China has been slow to allow its currency to appreciate, in part because policymakers want to protect farmers from import competition and they want to
maintain a high degree of self sufficiency in food. The threat of rising world
commodity prices driven by the boom in crop-based biofuels adds another risk
factor. Rising Chinese imports of grains and oilseeds triggered by currency
appreciation would add further upward pressure to world commodity prices.
These facets of the issue likely will prevent China from making a major adjustment in its exchange rate, instead continuing its policy of gradual adjustment.
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References
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Appendix—Food and Agricultural Price
Data in China
The Chinese government carefully monitors food and agricultural prices
collected by several different agencies. Retail food prices are collected
by household and retail market surveys; wholesale prices are collected
by reports from China’s network of wholesale markets; and farm-gate
prices are collected from farm household surveys and reports from rural
market fairs.
Most of the Chinese retail price data used in this report were collected by
the China Price Information Center (CPIC) of the National Development
and Reform Commission (NDRC), China’s leading policymaking body.
Average prices for an array of food commodities are reported by a sample
of 2 supermarkets and 2 farmers’ markets from each province every 10
days. A consumer price index based on household surveys for a limited
number of food categories is also published every month by the National
Bureau of Statistics (NBS).
Average farm prices were obtained from cost of production surveys
conducted by the price department of NDRC. These data come from price
and expenditure information recorded in diaries by a national sample
of 60,000 farms. Annual averages are published each year. Ministry of
Agriculture (MOA) and NBS conduct similar surveys, but they do not
publish prices. NBS also conducts a monthly survey of prices in rural market
fairs—the first point of sale for many farm commodities.
Wholesale market prices are collected by MOA, NBS, and CPIC. In
addition, many individual wholesale markets, provincial and local price
bureaus also report daily average prices on their web sites. The National
Grain and Oils Information Center surveys wholesale markets, trading
companies, and processors to obtain daily prices of grains, oilseeds, and
their products at various locations across the country, which are available
to paid subscribers.
Finally, approximations of border prices (export or import prices) can
be obtained from customs statistics, which typically report the value and
quantity of commodities exported and imported each month. Dividing
the value by the quantity provides a unit value that approximates the
border price.
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Appendix table 1
Sources of Chinese food and agricultural price data
Price type China government agencies
Description of data collection
Retail food prices
CPIC
Reports from supermarkets and farmers’ markets every.
10 days
NBS
Household surveys
Wholesale prices
CPIC, NBS, MOA, NGOIC
Reports from wholesale markets
Farm prices
COP, NBS, MOA
Diaries of receipts and expenditures kept by a national .
sample of farms
Reports from rural market fairs
NBS
Import/export prices
Customs statistics
Monthly reports of value and quantity of imports and .
exports
Note: CPIC=China Price Information Center, National Development and Reform Commission; COP = Cost of Production Surveys, Price
Department of National Development and Reform Commission; MOA = Ministry of Agriculture; NBS = National Bureau of Statistics; NGOIC =
National Grain and Oils Information Center.
Source: Compiled by U.S. Department of Agriculture, Economic Research Service.
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